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FM AMEMBASSY DUBLIN
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INFO RUCNMEM/EU MEMBER STATES
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 DUBLIN 001122 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR EI
SUBJECT: UP AND AWAY WITH AER LINGUS FLOTATION 
 
REF: DUBLIN 493 AND PREVIOUS 
 
DUBLIN 00001122  001.4 OF 002 
 
 
¶1.  (SBU) Summary: The privatization of Aer Lingus, Ireland's 
national airline, is all but complete, with the Government 
expected to reduce its share in the carrier from 85 percent 
to 25 percent following the October 2 stock market flotation. 
 Informal trading has already pushed Aer Lingus shares above 
their fixed price of euro 2.20, placing the carrier,s value 
at euro 1.2 billion.  The key to finalizing the flotation had 
been a recent labor-management agreement that increased 
employees' pay and committed a portion of the flotation 
proceeds to the carrier's pension fund.  The Irish Transport 
Department and the financial firm that advised the Government 
on the flotation have told Post that they are pleased with 
buoyant informal trading of Aer Lingus stock.  Although the 
absence of U.S.-Irish Open Skies apparently did not spook 
initial investors, Post expects that the Irish Government 
will step up tentative entreaties on a bilateral Open Skies 
arrangement if U.S.-EU aviation negotiations falter into 
¶2007.  We will also continue strong advocacy of Boeing as Aer 
Lingus, now flush with flotation earnings, turns to the 
expansion of its long-haul fleet.  End summary. 
 
 
Lift-off for Stock Flotation 
---------------------------- 
 
¶2.  (U) On September 27, the Irish Government took the final 
steps toward privatizing the national air carrier, Aer 
Lingus, by setting the stock price for the airline at euro 
2.20 and allocating shares to retail and institutional 
investors based on subscriptions finalized the previous day. 
Athough the carrier will not list officially on the Dublin 
and London stock exchanges until October 2, informal trading 
based on the allocations pushed the share price to euro 2.40 
on September 28.  At the close of trading, the airline's 
value stood at euro 1.2 billion, with earnings of euro 140 
million for the Irish Exchequer and euro 530 million for the 
carrier.  The breakdown of shares in Aer Lingus is now as 
follows: the Irish Government (34 percent); carrier employees 
(12.4 percent); former staff (2 percent); institutional 
investors (40 percent); and, retail investors (11.6 percent). 
 The Government is expected to reduce its share to 25 percent 
in the coming months by selling 3 percent to employees and 
another 6 percent to the market to ensure against volatile 
trading. 
 
Key Steps toward Privatization 
------------------------------ 
 
¶3.  (U) The central piece in the flotation process had fallen 
into place on September 20 when unions representing the 
carrier's 3,400 workers approved the move to market.  Under 
the terms of the management-labor agreement, workers will 
receive an across-the-board 4 percent pay increase following 
privatization.  Moreover, Aer Lingus CEO Dermot Mannion 
disavowed stock options for management arising from the 
flotation and committed to set aside euro 1.4 million of the 
carrier's flotation proceeds for the employee pension fund. 
Mannion informed the unions that management would use 
earnings from the flotation to leverage the euro 2 billion 
required for fleet expansion.  (As Mannion had previously 
told Post, Aer Lingus intends to increase long-haul aircraft 
from 7 to 14 and short-haul aircraft from 28-42.  In public 
remarks on September 27, he noted that Aer Lingus was 
considering offers from both Airbus and Boeing for the 
expansion program.) 
 
¶4.  (SBU) Besides negotiations with airline labor, Aer Lingus 
management had taken other measures in recent weeks to 
prepare for the flotation, including: 
 
A) CEO Mannion led a team on an investment roadshow through 
Dublin, Edinburgh, London, Frankfurt, Paris, Rome, New York, 
and Boston, focusing on institutional investors and the eight 
brokerages through which retail investors lodged 
subscriptions.  (Retail investors were required to purchase a 
minimum of euro 10,000 in shares as a guard against amateur 
investment.)  The Irish investment firm, Goodbody 
Stockbrokers, a subsidiary of Allied Irish Banks (AIB), 
participated in the road show as the Government's main 
financial advisor on the flotation. 
 
B) Management published the Aer Lingus prospectus on 
September 12.  The prospectus noted that operating profits 
were likely to slip from euro 90 million in 2005 to euro 67 
million this year, due largely to fuel price rises.  The 
prospectus not only noted that the stalled U.S.-EU aviation 
negotiations lent uncertainty to Aer Lingus' bid for greater 
U.S. market access, but also speculated that the Irish 
Government might seek a bilateral arrangement with the USG in 
 
DUBLIN 00001122  002.2 OF 002 
 
 
the absence of a U.S.-EU deal. 
 
C) On August 28, Transport Minister Martin Cullen appointed 
four new non-executive directors to the Aer Lingus board. 
One appointee was U.S. citizen Thomas Moran, President and 
Chief Executive of the insurance group, Mutual of America. 
Another appointee was David Begg, Secretary General of the 
Irish Congress of Trade Unions (ICTU), Ireland's largest 
union umbrella organization.  Begg's appointment was seen as 
a Government measure to ensure labor buy-in to the flotation. 
 
The Government and Goodbody: Very Pleased 
 
¶5.  (SBU) The Government was "exceedingly pleased" with the 
flotation's early outcome, Pol/Econ Chief was told on 
September 28 by Fintan Towey, Department of Transport 
Principal Officer for Aer Lingus Corporate Affairs.  Towey 
said that the rise in the carrier,s share price in informal 
trading had been a relief for Transport officials, who had 
been concerned by the initial slump in Air Berlin,s stock 
price after its IPO in the summer.  He agreed with media 
analysis that the drop in oil prices over the past two weeks 
had been propitious, raising investor confidence in the final 
days before Aer Lingus' share allocation.  The carrier's 
official listing on October 2, observed Towey, would 
consummate a drive toward privatization that had begun in the 
1990s.  He recalled that the last attempted flotation in 2001 
had been aborted due to adverse market conditions and poor 
labor relations, a situation that was exacerbated by 9/11. 
 
¶6.  (SBU) Goodbody Stockbrokers, the Government's financial 
advisor on the float, was similarly gratified by buoyant 
informal trading of Aer Lingus stock.  Goodbody aviation 
analyst Fionbhar Griffin told Pol/Econ Chief on September 28 
that a number of institutional investors had expressed 
disappointment that they had not been allocated as many 
shares as they had hoped.  He noted that Goodbody colleagues 
were now in New York to oversee a private placement with U.S. 
institutional investors, though he did not know the 
percentage of shares that these investors had been 
apportioned.  The Government, he added, was sensitive to the 
need to ensure that 50 percent of shares would remain in 
Irish hands to preserve Aer Lingus' rights under the 
U.S.-Irish bilateral aviation agreement.  Griffin explained 
that the Government had amended the company's articles of 
establishment and had been careful in selecting institutional 
investors to preclude the possibility of Irish ownership 
dipping below 50 percent. 
 
Comment: Open Skies and the Market 
 
¶7.  (SBU) Bullish informal trading indicates that the absence 
of bilateral Open Skies with Ireland was not as harmful to 
Aer Lingus' flotation as Irish Transport officials had 
previously feared.  In recent weeks, the Irish media had 
highlighted uncertainty in Aer Lingus' long-haul prospects 
due to the lack of Open Skies, but apparently this has not 
spooked investors.  To sustain Aer Lingus' market performance 
over the longer term, the carrier's management and the 
Government would obviously prefer to secure an Open Skies 
relationship that would open up additional U.S. destinations 
beyond the several cities now permitted under the bilateral 
agreement.  If U.S.-EU negotiations continue to falter into 
2007, Irish Transport officials will likely step up now 
tentative entreaties to the USG and EU Commission on a 
bilateral Open Skies arrangement. 
 
¶8.  (SBU) Post intends to continue strong advocacy on behalf 
of Boeing as Aer Lingus now turns to the expansion of its 
long-haul fleet.  CEO Dermot Mannion had been reluctant to 
move on aircraft purchases earlier because he was concerned 
about being seen to prejudge the outcome of management-labor 
negotiations.  With a labor agreement in hand, and with euro 
530 million in flotation earnings, Aer Lingus should have no 
further obstructions to a decision on aircraft purchases. 
KENNY